Commentary: China's growth is only the beginning

PaulErdman

HEALDSBURG, Calif. (MarketWatch) -- How soon will Asia -- meaning China and India -- begin to represent a major challenge to American economic and financial hegemony?

The National Intelligence Council, the research facility operating under the auspices of the Central Intelligence Agency, recently attempted to provide an answer to this question. It predicts the emergence of these two countries as full-fledged global economic powers in the year 2020. It suggests that by the year 2042 China's GDP will exceed that of the United States.

But didn't they say the same about Japan just two decades ago? If one had believed many of the "experts" back then, Japan Inc.'s GDP would already exceed that of the United States today. What makes China different?

Oded Schenker provides a succinct answer to this question in his new book, "The Chinese Century" published by the Wharton School. Japan Inc. of the 1980's, he writes, was synonymous with protectionism. That, along with a rapidly aging population and a banking system that nearly collapsed under the burden of immense amounts of bad debt, proved to be a deadly combination. Japan's forward momentum came to a halt in the 1990's and for more than a decade Japan has been going nowhere, lurching from recession to recession.

The rise of China began just as Japan peaked out as a potential threat to American economic hegemony. But what began to happen there stands is stark contrast to the protectionist policies of Japan and the Asia Tigers of the prior era.

Today's China, according to Schenker, has more in common with the rise of the United States a century earlier than its modern-day Asian counterparts. China's openness is the crucial difference, it being the only country in the world where domestic manufacturers maintain equity ventures with foreign competitors. That makes it possible to develop best practices from both and potentially end up with more knowledge than either. This is true today in industry after industry, ranging from makers of cars and tractors, to those producing semiconductors and cellular phones. Intel
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and Hewlett Packard
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now have manufacturing and research facilities in both Shanghai and Palo Alto.

And it is not just American companies that have huge direct investments in China. So do Germany's VW and Siemens, Switzerland's Novartis and Roche. Direct foreign investment in Chinese facilities has exceeded $50 billion a year for years now, and there are no signs of any drop-off in the near future. The result is that China is now beyond the "takeoff" phase and is racing at full speed into the future.

The presence of this new 800 pound gorilla is bound to affect the world in ways that are not all for the good. For one thing, it has to be fed. More precisely, it has to be fueled. And the fuel it needs is mostly taking the form of oil and its derivatives. To put this into a historical context, between 1984 and 2002 American consumption of crude oil increased 16 percent. During the same period, China's consumption increased 192 percent.

Today, even with a maturing economy, crude oil consumption in China continues to increase by 25 percent a year. The result is that China has already overtaken Japan as the second largest consumer of petroleum in the world, after the United States.

China has very limited domestic supplies of either oil or natural gas. So its needs must be filled by imports. And these imports come for the most part from the Middle East where rising Chinese demand puts it in direct competition with Europe, America and Japan for a limited global supply of crude petroleum. Something has to give, and that is the price for a barrel of Saudi crude oil and a gallon of gasoline in the United States. It does not take much imagination to extend this trend to other commodities, from copper to lumber to aluminum or platinum.

Were the coming Asian challenge to American hegemony restricted to China it would be daunting enough. But it will only be a matter of a little more time before we will be facing an equal challenge from India.

When one looks at these two nations in terms of population growth, the extent of the global economic revolution that is about to engulf us becomes even more startling. According to the just released UN report on World Population Prospects, there will be 1.44 billion Chinese in the Year 2025 dropping slightly to 1.39 billion by 2050. It will be in this time period, however, when India will overtake China as the nation with the world's largest population: 1.59 billion in 2050.

It is not unlikely that in the pull of this continuing population growth, and the development of modern economies propelled by very advanced innovative technology, by mid-century India's GDP will exceed that of China, and well exceed that of the United States.

The final article in this series will discuss the new India, and the investment opportunities that are available there.

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